5 strategies to buy and sell stocks using algo trading

Algorithmic trading is a trading method in which orders are executed by softwares on their own with predefined strategies or methods. Trading on algo platform is gaining traction among traders and investors as it involves less manual execution and more use of technology. It eliminates chances of errors due to minimum human involvement. Algo is used widely by investment banks, pension funds, mutual funds, and hedge funds that may need to spread out the execution of a larger order or perform trades too fast for human traders to react to.

• Trend Identification

Algo strategies can help you identify the trend or early reversal of the trend. Strategies on algo are based on price, volume, support, resistance or any other concept which the investor has confidence on and is comfortable with. Since algo uses technology and data, it has more chances to detect the correct trend. Also it is impossible for an investor to analyze large chunks of data and act on it within a short period of time. Algo makes it possible to use various strategies at once and decide on the net outcome of all strategies. For example, an investor can deploy 20 different strategies on a single stock. Out of these 20 stocks, 14 show buy signal and 6 show sell signal. Conclusively, the system will automatically buy the stock as majority strategies are showing buy signal.

• Delta Neutral Strategies

Delta means change in the price of the derivative with respect to change in the price of the underlying asset. Delta neutral means utilizing multiple positions to balance positive and negative deltas. Market movements have no effect on the portfolio which is delta neutral. A delta-neutral portfolio evens out the response to market movements for a certain range to bring the net change of the position to zero. Delta neutral strategies are manually impossible to manage. Continuous movement of an asset makes it even tougher. Through algorithms, it is quite easy to manage delta of your position as it is calculated automatically by the system and you are updated every second about your current portfolio or position.

• Position Sizing

One of the most important aspects of trading is position management. One of the key differences between an ordinary investor and a good investor is how good he is in managing his position under different circumstances. Algorithmic trading has made it easier as computers have no emotions and position sizing will be based on commands predefined in the system.

For example, you can prefix that the value of each trade will not be more than Rs 1 lakh on any share. If the price of a stock is Rs 100, the system will automatically buy 1,000 shares and if the price is Rs 2,500, the system will buy 40 shares. This will lead to investing in each stock of the same value, irrespective of any favoritism in any stock.

• Stop Loss Modification

In the stock market, it is very important to protect your profits and manage your portfolios in the right way. One of the best methods is modifying stop losses. Since markets are unpredictable and it is very difficult to manage large portfolios, algorithms provides you with easy solutions to manage risk. Systems can be fitted with strategies which changes stop losses on movement of the stocks in the portfolio. These stop losses can be based on various technical techniques, price movements, etc.

If you are a swing trader and you put a stop loss of 3 per cent on every position and stop loss changes on positive movement in the stock of every 3 per cent. The price of a particular stock is Rs 100 and the current stop loss is Rs 97. As the stock price rallies to Rs 103, the stop loss changes to Rs 100. The process will further move on in the same way. With algo, you can trade in larger quantities as the risk is automatically managed by a predefined system.

• Scalping

Scalping is a strategy where in traders buy and sell a particular share or commodity at a fixed interval. There are two types of scalping models - forward scalping and reverse scalping. If a trader buys when the market advances, it is known as forward scalping, and if the buyer buys when the market declines, it is known as reverse scalping.

(The author is the managing director of Findoc Group. Views are his own)